Which costs less: Arbitration or litigation?

In our first column, we talked about three situations in which arbitration can help eliminate some corporate litigation pitfalls. Here, we share a comparative study of 19 single-plaintiff cases—nine resolved through arbitration and 10 resoloved in court—to help you decide whether to apply arbitration broadly or on a case-by-case basis. The comparative study is the product of a company assessment into whether its arbitration program with employees lowered litigation costs and yielded better results than litigation. The big-picture takeaway is that arbitration is not a panacea to lowering litigation costs. The study, in a nutshell, shows that arbitration costs rival those of litigation. Customization of the process is key, rather than a one-size-fits-all approach. The study is, of course, not a tell-all; the devil is in the details. An analysis of the outlier arbitration cases that increased costs can help you craft arbitration provisions to help avoid those extremes. Let’s look at the case study’s results and the reasons behind them. We’ll then wrap up with a discussion on how to best use the results.

The numbers game: Outside counsel fees, arbitration costs and number of months to resolution

Of the 19 cases in the study, nine were resolved through arbitration; 10 were litigated in court. The study focused on outside counsel fees, arbitration costs, results and time to resolution. The study demonstrates that arbitration—on average—is more expensive and slower than litigation. Although the study analyzed employment-related disputes, the results can be extrapolated to estimate costs and time to resolution in all types of disputes, including business and consumer-related disputes.

The numbers in the study are telling: The nine cases resolved through arbitration incurred a total of $710,323.50 in outside counsel fees, with an average outside counsel bill of $78,924.84.The 10 cases in litigation cost an aggregate $631,443.28 in outside counsel fees but averaged roughly $63,144.33 per case—less than $15,000 per case! The arbitration cases incurred $921,042.22 in total costs and outside counsel fees, with an average per-case expenditure of $102,338.02.Butin the litigation cases, total costs and outside counsel fees were $704,908.20, with an average per-case expenditure of $70,490.82—a difference of more than $30,000 per case!Arbitration fared no better in getting to the finish line faster. For cases litigated in court, the median case lifecycle was 19 months. By contrast, the median arbitration case lasted 21 months.

One outlier case showed the arbitration process running amok. This arbitration case lasted 10 months longer than the longest trial and resulted in 62 percent higher costs than the most expensive trial! This was due to having to reconvene a three- arbitrator panel several times—months apart—to conclude the hearing. Whether in court or arbitration, moving the matter quickly is always important to overall costs. The charts below summarizes 1) outside counsel fees; 2) total arbitration costs and outside counsel fees; and 3) time to a resolution.

Making sense of the results

The primary reason for this longer time and increased expense is that litigation cases, unlike arbitration, may often be disposed of through dispositive motion practice or directed verdicts after the presentation of one side’s case. Because arbitrators are loath to use this power for risk of being reversed (not to mention losing their job), they tend to err on the side of caution, and frequently deny motions to dismiss and for summary judgment. Of the cases in the study, three of the 10 court cases were resolved through dispositive motion practice, correlating with some of the lower lifecycles and costs.

How to use the results

The results can help you avoid the costly outliers while attempting to achieve speed and efficiency in arbitration. First, if your company has an arbitration program with employees, and if the employee sues your company in court, thoroughly and quickly assess the chances of success on a dispositive motion. If the venue and the facts are favorable, the company may want to forego compelling arbitration in that particular case. Second, consider including a timetable for hearing (i.e. within 120 days of the date of the initial hearing with the arbitration case manager) in your arbitration agreements to reduce the time to resolution (and thus costs). Third, specify the number of arbitrators and whether the prevailing party should recover the costs of the arbitrators and attorneys’ fees. The prevailing-party provision is not advisable in an employment or consumer context as it could very well invalidate your entire arbitration agreement and hence any class action waivers included therein.

In our next column, we’ll analyze the national legal landscape and identify court challenges that you may face with certain arbitration provisions, including class action waivers, as part of the continuing analysis regarding whether to arbitrate.